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Novo Group Hops Onto Dual Listing Bandwagon

Contributed by Shares Investment

By Clement Kan

Since its reverse takeover of Neocorp International in March 2008, Novo Group (Novo) has never witnessed its share price go beyond the $0.25 mark. But on 8 January this year, the Mainboard-listed global steel supply chain management company jumped four cents, or 18.2%, to close the day at $0.26. The catalyst: The announcement of dual listing plans on the Hong Kong Stock Exchange (HKSE).

Even though its share price has moved back to pre-announcement levels (refer to historical prices), Novo has very much laid out clear, concrete business expansion initiatives, which could propel the company into the big league going forward.

Playing A Vital Role

Unlike other steel stockists listed on the Singapore Exchange, Novo provides integrated support services throughout the steel value chain.

“We derive our margins from the management of the value chain activities,” Dicky Yu, Executive Chairman of Novo, told Shares Investment (Singapore) in a recent interview. “We hope to emulate the success of Noble Group and Olam International in the area of supply chain management,” Yu exclaimed.

Armed with capabilities to directly source and procure in bulk from major steel mills worldwide, Novo supplies a diverse range of steel products to end-users and concurrently assists these steel mills in efficiently and cost effectively sourcing for raw materials, of which the bulk originates from Brazil (50%) and India (25%), while Indonesia and Australia contribute the rest.

Notably, more than half of the top 40 steel producing companies around the globe are Novo’s partners, including the likes of ArcelorMittal, Nippon Steel, Usiminas, CSN, US Steel, Evraz and Anshan-Benxi amongst many others.

In the process, the company creates value through its integrated support services, encompassing demand aggregation and disaggregation, logistics, trade financing, inspection services as well as shipping.

“All iron ore looks the same to our naked eyes. In order to ensure the quality, we have to send our people to inspect truck by truck,” explained Yu. “The end-users would not want to do this hard work, as this is not their specialty,” he added.

As one of Novo’s foremost priorities is managing costs, the company has established a shipping arm in September last year to provide vessel chartering services, catering to its own business needs as well as those of third party customers.

Exciting Year Ahead

Apart from its aforementioned intention to dual-list in Hong Kong, Novo has earlier procured a piece of land measuring 25,000 square metres in Tianjin, PRC, with the aim of erecting a steel processing centre that is capable of handling 100,000 MT hot-rolled coil and 100,000 MT cold-rolled coil to be cut, slitted and packed for local market distribution. According to Yu, the factory construction and equipment installation are expected to complete within the second half of 2010, with Novo injecting a total capital of some US$2.3 million.

The company is also making a calculated move into the scrap processing business, after certain subsidiaries received the ISO9001:2008 certification, import license and environmental license for dealing with scrap business in the PRC.

More specifically, a scrap processing plant will be constructed along the Yangtze River coastal line, with initial processing capacity of 1 million tonnes. Costing an estimated US$24 million, the plant is expected to commence production in 2011. To facilitate this plant, two public piers, which are able to handle 50,000 tonnes of iron ores and steel products to be imported and exported, will also be built.

With regards to its international trading business, Novo has secured fixed allocations of certain quality of iron ore from major iron ore mines/suppliers, providing a stable income for the company. Meanwhile, Novo has set up another subsidiary to handle non-steel trading, further diversifying its revenue stream. With regards to this new venture, Yu highlighted that the company has managed to conclude coal trading contracts and is expecting to obtain fixed allocations from coal mines in the near future.

“We are also looking at investing in coal and iron ore mines, and are in the midst of conducting feasibility studies,” Yu commented. This would further develop the company’s business upstream, in turn enhancing shareholders’ value.

To fund its business expansion plans, Novo has placed out 60 million shares at $0.23 apiece, effectively boosting its coffers by approximately $13.3 million.

Healthy Recovery

Even though Novo suffered a 37.3% revenue slump to US$218.0 million for the 6 months ended 31 October 2009, the company’s bottomline swelled from prior period’s US$0.2 million to US$5.5 million. This was largely attributable to the change of product mix in 1H10.

Its gross margin improved remarkably from 1H09’s 9.3% to 15.1%. For 1H10, Novo generated net cash from operating activities of US$4.9 million as opposed to a net cash outflow of US$4.9 million for 1H09. As at the end of the reporting period, the company had cash and bank balances of US$23.5 million, with current ratio of 2.9 times and no long-term debt.

Putting things into perspective, Yu mentioned that producing one ton of steel requires the use of 1.6 tons of iron ore. As China is estimated to produce over 600 million tons of steel products in 2010, the country would require 960 million tons of iron ore. “Local iron ore mines can only produce about 200 million tons, while the remainder have to be imported,” Yu said. Hence, opportunities are certainly in abundance and there for the taking.

Just like most of the dual listing plays, Novo should see another spike up in its share price upon definite confirmation of its foray on the HKSE. However, the sustainability of this appreciation will ultimately boil down to the company’s ability to successfully execute all of its promising plans for growth.

This article is contributed by Shares Investment. Visit Sharesinv.com for the latest Singapore, Malaysia and China stock market news and reports.